If the thought of having your own online retail store has ever crossed your mind, you’ve certainly heard the word “dropshipping” over and over again like some magic spell. Isn’t it magic indeed to have no responsibility for procuring, storing and shipping goods? Sounds like it really is, but let’s look closer at what this fairy-tale magic looks like in real life.
When a newbie entrepreneur enters the world of e-commerce, the first question that troubles their mind isn’t even what to sell, but where to sell for profit. Among a variety of e-commerce platforms there are doubtless leaders like Amazon, eBay, Shopify, Etsy, Walmart, that have huge outreach, lots of useful tools and great reputation with customers.
According to the report on top 10 online stores in the U.S., Amazon.com is leading the U.S. e-commerce market, with global net sales of US$ 131 bn in 2021. Being one of the world’s most valuable brands (US$ 705.65 bn), Amazon provides a successful online retail platform for businesses of all scales and sells its own branded goods and services.
This e-commerce giant was founded in 1994 by Jeffrey P. Bezos with a focus on e-commerce, cloud computing, digital streaming, and artificial intelligence, and has successfully evolved into a multinational and fast-growing e-commerce company.
According to statista.com the United States was Amazon’s biggest market in 2021 with $ 314 bn in net sales.
In this article, we’ll look into dropshipping on Amazon and cover everything you need to know about it.
- What is the cost of Amazon dropshipping?
- How profitable is dropshipping on Amazon? Amazon dropshipping margins
- How long does it take to start a dropshipping business on Amazon?
- What categories are popular for dropshipping on Amazon?
What is dropshipping?
• Amazon’s business models
Let’s get back to the most essential questions for an aspiring e-commerce entrepreneur – Where to sell? and What to sell?
The issue of choosing an e-commerce platform is closely connected to defining a business model you’re going to use. This choice predetermines and sometimes limits the products you choose to sell. There’s a huge difference between selling your handmade items and dropshipping a number of different items that are produced inside or outside the country. According to the Jungle Scout’s 2022 State of the Amazon Seller Report, there are six most popular business models people use to sell on Amazon:
- Private Label: 59%;
- Wholesale: 26%;
- Retail Arbitrage: 26%;
- Online Arbitrage: 23%;
- Dropshipping: 10%;
- Handmade: 8%.
It’s necessary to mention that the overlap in percentages means that some sellers use more than one model.
Private label is the most common model among Amazon sellers. It actually means identifying a product with high demand and low competition, finding a manufacturer to produce it, branding and promoting the product on Amazon.
Wholesale is buying low-cost or discounted items in bulk and then selling them on Amazon as individual units.
Retail Arbitrage is reselling online low-cost or discounted goods purchased from brick-and-mortar retail stores.
Online Arbitrage is finding a low-cost or discounted product on one website or online marketplace and selling them on Amazon.
Dropshipping is a business model which means that instead of keeping their own product inventory, Amazon sellers transfer their customers’ orders directly to a manufacturer or supplier.
Handmade, as prompted by the word itself, is creating your own product by hand and selling on Amazon.
These short business model descriptions actually reveal what you sell and how you procure the goods, including some ways of sourcing the items to sell on Amazon like brick-and-mortar retail stores, online marketplaces, manufacturers and sellers’ creativity in the case of handmade.
• Order fulfillment option
Amazon also defines dropshipping “an order fulfillment option that allows e-commerce businesses to outsource procuring, storing, and shipping products to a third party”. That shifts the focus from the way you source your goods to how you actually handle the order.
Whether a business model or an order fulfillment option, dropshipping has its peculiarities we’re about to explore.
How does Amazon dropshipping work?
The very definition of dropshipping gives an idea of how it works. Dropshipping is defined as a form of retail business, in which a seller transfers customers’ orders directly to a dropshipper who fulfills the order and ships it to a customer. This definition shows that the intermediary step of buying and storing the goods at the warehouse is skipped. The seller is responsible for marketing and selling the product at their online store, while the dropshipper (whether a manufacturer or wholesaler) takes the responsibility for creating, procuring and shipping the product to the customer.
If we look into the sequence of steps in a dropshipping model, it would follow this structure (as described by Amazon):
- Seller signs agreement with dropshipper and sets up their online store.
- Customer orders online.
- Seller receives order.
- Customer receives an order confirmation.
- Seller forwards the order to dropshipper. At this point dropshipper charges seller a price for the product sold, normally wholesale plus a dropshipping fee.
- Dropshipper ships the order.
- Customer receives their product.
The participants in dropshipping
The whole process is seemingly simple, but let’s look at the participants of a dropshipping business closer. As it was mentioned before, there are sellers, dropshippers and customers.
- Customers are the drivers of the whole process. They look for the goods, order and pay for them.
- Dropshippers or suppliers can be divided into manufacturers and wholesalers, providing dropshipping services. In case a manufacturer is also a dropshipper, the product supply chain is shorter and a seller performs the function of a middleman between a manufacturer and a customer. In real life, many manufacturers sell in bulk, which might be an obstacle for your business. If a dropshipper is a wholesaler, the product supply chain is longer, and as there’s more than one middleman, a seller buys from a wholesaler at some markup. That is obviously reflected in the final price.
- Sellers or sellers of record (SoR) is the most interesting part of the chain if we look at it from the point of a dropshipping business. The responsibilities of sellers are setting the final price for the product, paying the sales tax on a particular sale, recording the purchase as revenue. Sellers of record who chose to work with dropshipping abide by Amazon’s dropshipping policy.
According to this policy, sellers who use dropshippers to fulfill the orders should:
- Sign an agreement with dropshippers that guarantees that they (sellers) will be identified as such on all the documents concerning the products (packing slips, invoices, external packaging);
- Be responsible for dealing with customer returns of the products sold;
- Follow all the terms of their seller agreement.
Following these rules helps to avoid any confusion as to who the seller of record is, especially in case of returns. Violating the policy, the seller risks having their account suspended.
Amazon dropshipping in numbers: FAQ
If the process and participants of dropshipping are quite clear now, one might want to know the numbers that will help to decide whether this type of fulfillment is appropriate for a particular business or if it’s profitable to start a dropshipping business. Let’s explore the most typical dropshipping questions asked with the help of Jungle scout, an online tool for growing Amazon business and their report that features information on the survey of about 5000 Amazon sellers.
What is the cost of Amazon dropshipping?
Half of the sellers using the dropshipping method said that they spend less than $2,500 to start selling on Amazon, 17% – less than $500.
To start selling on Amazon, it’s necessary to set up your Amazon seller account and choose between individual and professional selling plans, which charge their fees. There’s also a referral fee for each item sold. It’s wise to consider all types of fees your business is going to pay to choose the right combination.
How profitable is dropshipping on Amazon? Amazon dropshipping margins.
About 39% of the sellers using dropshipping earn under $5,000 on Amazon with 48% reporting profit margins between 11-25%.
The average dropshipping margin on Amazon is between 10% and 30% with Amazon taking about 15% off.
Considering that your margin is about 30%, you’ll have a margin of 15% after selling a product using Amazon dropshipping. If you’re lucky to win the Amazon Buy Box, these margins increase.
How long does it take to start a dropshipping business on Amazon?
On average, starting a dropshipping business on Amazon is more time consuming in comparison with some other business models. About 56% reported that it took longer than six weeks. 10% of the sellers using dropshipping said it took over a year to get started.
What categories are popular for dropshipping on Amazon?
The top 5 most popular categories for dropshipping are:
- Home & Kitchen: 50%;
- Sports & Outdoors: 35%;
- Kitchen & Dining: 32%;
- Tools & Home Improvement: 32%;
- Garden & Outdoor: 31%.
Amazon dropshipping business benefits and limitations
Every type of business model has its potential benefits and limitations. Dropshipping is no exception here. While it might seem easy to dropship on Amazon, it’s wise to consider whether certain gains are worth the effort. The answer to this question depends on a particular e-commerce business and its goals.
Potential benefits of Amazon dropshipping:
1. Low starting costs
Dropshipping on Amazon might be a good solution for those entrepreneurs who aspire to start their business with minimum investment and risk. Dropshipping option boasts zero up-front costs as you don’t need to have products in stock and then risk shortage or overstock. As it was mentioned before, 17% of businesses that choose to start Amazon dropshipping spend under $ 500.
2. Minimized overhead costs
Amazon dropshipping allows you to economize on manufacturing, storing and shipping the goods, as your only concern is to sell the products. In case your business dropships some of the goods, there’s a lot of potential for some other products or processes that need more attention. A dropshipping business is a relief for those suffering from a packaging and shipping nightmare.
3. Wider outreach
The Amazon dropshipping option gives you the freedom of working from anywhere. Wide range of wholesalers and manufacturers gives the opportunity to sell products that are manufactured in different countries to your customers around the globe. Amazon is represented on 5 continents and ships to over 100 countries providing e-commerce businesses with endless opportunities.
Huge choice of suppliers with products of all kinds and no need to buy and store the goods allows a business to process more orders, which naturally boosts scalability of Amazon dropshipping.
5. Multi-channel selling
Your e-commerce business can successfully combine selling from your own domain, dropshipping from Amazon or other marketplaces, as well as using social networks to promote and sell goods.
Potential limitations for Amazon dropshipping:
1. High competition
Dropshipping is increasingly competitive as it has low starting costs and every retailer has access to the same number of wholesalers and manufacturers, which means to the same products.
2. Branding issues
As it was just mentioned, the products you procure from dropshippers are hardly unique, which means that you might want to focus your effort on creating a brand that will stand out.
3. Lower profit margins
High competition and products that aren’t distinguished from others in the same category may lead to a lower final price and lower profit margins.
4. Lack of control over product quality
Being the seller of record, you’re responsible for product quality and delivery where you have little involvement and control. This might directly affect your brand name reputation and building long-term relations with your clients.
5. Lack of control over fulfillment
Same as with product quality, you can hardly control all the steps of the fulfillment process. Selection, packaging and shipment are entirely in the hands of your dropshipper. Stock availability is very often not updated every minute, which may result in the situation when a customer orders something out of stock. In case something goes wrong in the fulfillment process, you’re the one handling the return process and suffer reputation damage.
6. Less special offers for customers
Because you’re not physically fulfilling the order such options as “free shipping” or “bundles” may not be available for your customers.
Knowing all that, it should be easier to weigh up whether dropshipping is the best option for your e-commerce business. Do you want to start a strong and unique brand? Do you want to dropship generic products? Do the benefits of dropshipping outweigh its shortcomings? These are the questions that a new e-commerce business needs to answer.
How to dropship on Amazon?
The Amazon dropshipping guide consists of the following steps:
- Set up an Amazon seller account choosing one of the plans: individual or professional. With the Amazon individual selling plan the seller pays $ 0.99 per item sold, while the Amazon professional selling plan charges $ 39.99 per month, regardless of how many items are sold.
- Find a high-demand and low-competition product to sell on Amazon. Identify the most profitable category, niche to choose what you want to sell on your e-commerce store. There are many ways and tools that can help you find your niche (Trend Hunter, Google Trends, YouTube, AMZscout, Jungle Scout). It requires a bit of research and planning.
- Get Amazon’s approval for your products. This step might be necessary for some categories of product or certain products in the category. Examples of categories that need Amazon’s approval are: Fine Art, jewelry, music and DVD, watches, collectible coins, services and some others.
- Find your dropshippers. This step is crucially important as your reputation as the seller of record depends on your dropshipper. Just googling the word “dropshipper” won’t do in this situation as dropshippers mostly work in the B2B sector. B2B companies use fairly different strategies for attracting and converting their clients. SEO or consumer marketing aren’t at the top of their priorities, consequently dropshippers or suppliers won’t head your search list. It should help to find lists of suppliers, articles dedicated to dropshippers by googling the terms “wholesaler”, “dropshipper”, “distributor” with the combination of products or categories of products you intend to sell. There’s a nice overview of 13 best dropshipping suppliers in 2022 by Shopify. It’s certainly worth a look if the only option that comes to your mind is AliExpress.
Your search for potential dropshippers shouldn’t be limited to the Internet only. Many manufacturers will provide you with a list of trusted wholesalers if you contact them.
- Create a listing for the product on Amazon. Amazon gives direct and specific guidelines on creating listings. In a nutshell, there’s a drop-down menu under the Inventory in your seller account. You need to choose “Add a Product” and either to match to an existing product detail page in the Amazon catalog or create a new detail page for a product that isn’t yet in the catalog and then create a listing for that product. There are options of creating one listing at a time and creating listings in bulk. When setting a price for your product, have in mind Amazon’s fees.
- Inform the dropshipper about the order. Once a customer orders from you, deliver the customer’s shipping information to your dropshipper so they can fulfill the order.
Amazon dropshipping tools and apps
All e-commerce businesses rely on a number of tools and apps as they significantly simplify business processes.
- Amazon provides its clients with an ample variety of its own tools for various purposes: from brand building, listings promotion to a revenue calculator. It’s worth exploring all the opportunities of Amazon.
- There are complete tool sets only for Amazon sellers like AMZscout, Jungle Scout, Feedvisor, which provide their clients with a range of options (product tracking, listings builder, advertising analytics, to name but a few) for dropshipping on Amazon.
- There are tools that help to solve one or a number of issues for your e-commerce business, whether you dropship on Amazon or some other platforms like eBay, Shopify or Walmart, or even combine online and brick-and-mortar retail.
- Feedcheck helps you to work with customer reviews over all of your selling channels and improve your products and services.
- Keepa tracks the price history of Amazon products and helps to estimate a product’s long-term performance, which is crucial when sourcing products for dropshipping.
- Sellery is a real-time Amazon repricing software which creates repricing strategies to win the Buy Box and increase Amazon sales and profits automatically.
Synder for dropshipping business accounting and analytics
These are just a couple of examples for Amazon tools and apps that cover different aspects of an e-commerce business apart from one of the most essential – accounting. And Synder is here to help out by providing a smooth reconciliation process and constant support for your business. Synder has the highest number of integrations adding more on a regular basis. Platforms available on Synder include all the big e-commerce platforms like Shopify, Amazon, eBay and more, plus lots of payment platforms like Stripe, Paypal, Square and many others. Synder isn’t only a reliable accounting software, but also an e-commerce business intelligence tool (Synder Insights) that has your business data analytics helping you scale strategically.
Synder’s automating process is pretty straightforward, you have to follow some steps:
- Sign up to Synder (you can start your free trial with no credit card required);
- State your role in the company;
- Set up your organization;
- Select Accounting system, Amazon as sales channel and add your payment processors from the list;
- Connect all the chosen options to Synder, add your checking account.
Now you’re all set for the test of the software.
Successful dropshipping on Amazon
There are some tips to help you navigate Amazon’s waters:
Value your reputation. It has to be said here that connecting your Shopify store to Amazon dropshipping is fine. You can sell products using the dropshipping option from many channels. While Amazon dropshipping from other online retailers is technically possible, it’s certainly frowned upon. The customer who bought a more expensive product from Amazon and got it with Walmart or eBay labels can easily check those platforms for the price and will never return again. Let’s be precise, this type of reselling is actually online arbitrage. To be sure your business is honest and transparent, it’s better not to resell from other retailers.
No third-party labels. When using Aliexpress or other suppliers to fulfill your dropshipping orders, make sure to contact your suppliers ahead of time to ensure they won’t ship orders with their company information.
Get a test order from your supplier. It cannot harm your business to know what you’re about to dropship. Try making test orders from your suppliers preferably without them knowing you’re dropshipping on Amazon. When you receive the goods, look at them from your clients’ perspective: the quality of the product, the unboxing experience, the time it took to get it – everything that can help you win loyal clients.
Build your brand. It’s surprising sometimes that companies selling identical products can have totally different success rates. Product price in dropshipping gives little competitive advantage as sellers have access to the same suppliers. On the contrary, an attractive brand and impeccable service can help you lure more clients even if your price is the highest in the category.
Promote your listings. Getting more traffic to your listings is of crucial importance given that you aren’t selling one-of-a-kind products. Amazon’s internal solution is PPC or Pay-per-click. At the same time you can employ external methods like advertising through social networks, using the outreach of influencers, writing a blog or email marketing.
After looking into some details and peculiarities of dropshipping on Amazon, it might be easier to decide whether this option satisfies the needs and demands of your business.
Some things are certain though. If you want to grow a successful and honest business, think about your clients first, know what you sell, be responsible for handling returns, use appropriate marketing strategies, and don’t neglect useful software. Following these simple tips helps to build a long-term and trusting relationship between your business and your clients.